10:00 AM New York – Burlington Northern Santa Fe agreed to be acquired by Warren Buffett controlled Berkshire Hathaway that values the railroad operator at $44 billion. Berkshire will pay $100 a share in cash and stock, 31% premium. The deal appears to take into account higher oil prices.

Burlington Northern Santa Fe agreed to be acquired by investment company Berkshire Hathaway controlled by Warren E. Buffett in a deal valuing the company at $44 billion that includes the assumption of $10 billion in debt.

Berkshire agreed to pay $100 in stock and cash for the 77.4% stake in the company that it does not own. Buffett, over the last two years accumulated 32.6% stake in the company.

Deal Specifics

Berkshire will pay $16 billion in cash and rest will be paid in Class A stock. Of the cash payment, $8 billion will be paid from the cash reserves at Berkshire and $8 billon will be borrowed from the banks that will be repaid over three years.

Berkshire price is 31% premium to the Monday’s closing price of Burlington Northern.

Berkshire also decided to split its class B stock 50-to-1 to pay for the deal. It is rare for Berkshire to pay for a deal with its own stock.

Goldman Sachs and Burlington Northern acted as financial advisors to Burlington Northern and Cravath Swaine & Moore acted as its legal advisor.

Berkshire Hathaway was advised by Munger, Tolles and Olson and did not say if it had any financial advisor.

Earnings Review

Burlington Northern earnings have jumped to $2.2 billion in 2008 from $1.54 billion in 2005. Earnings per share increased in the period to $6.08 from $4.02. Burlington is expected to earn $5.15 a share in 2010 and trades at $18.2 times multiple.

At that valuation, the earnings yield for the deal is 5.5% and if the earnings double in the next ten years the yield on the deal will jump to 11%.

Why Railroad Now?

The deal is the largest deal for Berkshire and for Buffett.

Buffet promoted the deal saying, “it’s an all-in wager on the economic future of the United States. I love these bets.”

Though the statement issued by Berkshire and Burlington focused on the importance of the railroad to the nation’s transportation infrastructure, the deal appears to have many other moving parts.

It appears that Buffett’s analysis focuses on the potential rise in oil price which increases the railroads’ operating cost but more so for its competitors in the trucking industry.

If oil stays at elevated level more intermodal transportation could shift to the railroads. And, that is where the earnings leverage potential.

Railroads enjoy between three-to-five times price advantage over trucking companies when it comes to long distance haulage.

If oil price remains high as the dollar weakens and the U.S. economy regains its momentum, railroads have a potential to increase their business substantially.